Impact investing via Private Debt

Impact investing via Private Debt

There seems to be a narrative where private debt and impact investing go hand in hand and collaboration between the two could accelerate the penetration of the both.

When analyzing trends in global capital market, one of the most interesting recent developments has been the prominence that impact investing has been gaining not only in developed markets but also in emerging markets. Despite this increased relevance, most market players do not yet understand exactly what impact investing means.

The more objective definition for the concept is that impact investing seeks to invest in companies and projects aiming to obtain, at the same time and with the same level of relevance, financial return and social impact.

The growth of impact investing around the world can be measured by data published by surveys conducted by GIIN, Global Impact Investing Network, a nonprofit organization that aims to increase the penetration and efficiency of impact investing investments around the world. GIIN research data shows that, based on information collected from 226 investors, at the end of 2017, the total volume of assets allocated to impact investing around the world was $ 228 billion. This compares to $114 billion at the end of 2016, based on data collected from 209 investors.

The same survey shows that private debt is one of the main instruments used by investors to implement their investment strategies in impact investing. In 2017, based on data from the previous year, 59 investors reported having invested $ 38 billion globally in impact investing through private debt. This volume accounted for 33% of total assets under management in impact investing.

The research focused on two types of funds: Private Debt Impact Funds (PDIF), which invest primarily in assets located in emerging markets, and in the so-called Community Development Loan Funds (CDLF) that invest only in the United States. According to the research, PDIF generated an average annual return of 2.6% since 2012 while for the CDFL, the average annual return in the period was 2.9%. As in the private debt segment, when we focus our analysis in Brazil and even in the rest of Latin America, we see that the growth of impact investing has been slower than in the developed market.

A study conducted jointly by the Latin America Venture Capital Association (LAVCA) and the Aspen Network of Development Entrepreneurs (ANDE) showed that, in 2017, the volume invested in impact investments in Latin America was US$4.7 billion, administered by 67 investors. Of these investors, 22 were based in the United States and 13 in Europe. Based on the same study, in Brazil, the volume allocated to impact investing was only US $ 343 million, or only 7% of the total allocated to Latin America.

Despite the low volume of investments in impact investing in Brazil, it is interesting to note that among those who answered the survey, 71% mentioned having invested through debt instruments; the most used debt instruments were convertible debt (83%), traditional loan (52%) and loan based on revenue (13%). As a reflection, we can argue that private debt funds in Brazil end up having an important social impact in the way they operate, since:

1. A large part of the funds invested by the Brazilian private debt funds is allocated to loans to small and medium-sized enterprises (SMEs), a segment that has limited access to longer-term financing and palatable costs through traditional financial institutions;

2. SEBRAE studies show that in Brazil, SMEs account for 27% of GDP, 52% of formal jobs and 40% of salaries paid;

3. The strategy to increase the supply of credit to this segment, and thus to collaborate with the objective of the businesses involved to achieve perennialism with profitability, can and should be considered a strategy that combines financial return with social impact.